Today, US and European benchmark interest rates sit close to their highest levels seen over the last 15-20 years. As a result of these historically elevated rates, inflation has declined to or close to the 2% level targeted by major central banks. Economic growth is now running below average in Europe and China and is decelerating in the US. Central banks have thus switched their focus to supporting employment and growth by cutting interest rates. We expect this coordinated central bank rate-cutting cycle to continue at least until late 2025.
Long-term interest rates (bond yields) have already dropped since April in anticipation of falling inflation and short-term interest rates. This already represents substantial support to the global economy (which has become more sensitive to long-term rates in recent years) as well as to corporates and thus to stock markets.
Our recommendations
A multi-asset theme focused on stocks, bonds, commodities, real estate and private assets.
- Switch from cash to other assets including bonds to benefit from carry.
- Profit from a steeper yield curve, e.g. invest in Bank stocks, sector.
- Industrial sectors because industrial activity will rebound on lower rates.
- Mid-/small-caps to benefit in a rate-cutting + soft-landing scenario.
- Gold, which will benefit from falling central bank rates.
- Leveraged asset classes helped by falling rates: real estate, private equity, infrastructure
Key risks
- Increasing deglobalisation, escalating trade wars and rising protectionism could dampen economic growth while simultaneously putting upward pressure on inflation.
- Inflation may flare up again, forcing central banks to slow down the monetary easing process or, in the worst-case scenario, to reverse course by hiking rates again.
- Should our base-case scenario of a soft landing not materialise, risky assets (stocks, corporate bonds) could underperform despite monetary tailwinds.
